ContractsProf Blog

Teaching Assistants: Sid DeLong on the Difference Between Legal Bribery and Blackmail

I just finished teaching duress.  The Restatement approach to duress requires an improper threat.  As usual, I found it hard to draw the line between offer and threat in a way that helped my students.  Looking for some new material, I came across my co-blogger Sid Delong's article, Coasean Blackmail: Protection Markets and Protection Rackets in the Kansas Law Review. 

In many situations, Sid finds courts' attempts to distinguish offers from threats unhelpful.  As Sid notes, inhibiting threats could inhibit a party's good faith offer to forego a harmful action at a reasonable price.   Sid provides numerous examples illustrating how transactions that lead to identical substantive outcomes can be viewed as either offers or  threats, depending on which party initiated the transaction.  What the law ought to be concerned with is not the line between threats and offers, but whether the transaction results in unjust enrichment. 

Ronald Coase
Image by University Chicago Law School

Applying Coasean theory, Sid argues that we should abandon talk of threats as part of the law of duress in the context of protection schemes.  Lawful bribery occurs when we pay an actor (the "menace") to forbear from engaging in harmful activities.  In The Problem of Social Cost, Coase demonstrated how parties can negotiate efficient solutions to problems raised by externalities without legal regulation.  Sid argues that Coasean theory can help us distinguish protection markets from protection rackets.  If the cost paid to the menace exceeds the potential harm from the activities, then the bribe tips over into extortion and unjustly enriches the menace.  Sid wants a legal system that distinguishes between lawful bribes and illegal extortion on this basis, and we don't have it.  

When bribery tips over into blackmail, the victim ought to be able to recover, not because they were subjected to an improper threat, but because the menace extracted a price in excess of its costs for foregoing engaging in a profitable activity that harms others.  The menace was thereby unjustly enriched, and the victim is entitled to recovery, but only to the extent of the unjust enrichment.  In the context of Coasean bargains, we assume no illegal or tortious conduct.  In such contexts, "the blackmailer is entitled to be compensated for the cost of his forbearance, but he is not entitled to profit from the pain he can cause the victim."

Sid's approach also has value in the context of "secrets" blackmail; that is, contexts in which the menace demands payments to refrain from disclosing information that would be harmful to the victim.  Absent some social utility in disclosure, such demands are always actionable blackmail in Sid's view, because the cost of forbearance is zero.  

Coase did not think legislative solutions could address the problem of externalities, because legislative solutions tend to be sweeping, and the problems caused by externalities vary from instance to instance.  Sid provides greater context in support of Coase's view.  Sid notes that people are better positioned to negotiate reasonable solutions ex ante than ex post.  If you are setting up a beer garden next to a factory, the best time to negotiate an agreement that will protect the beer garden from smoke or fumes from the factory is before both begin operations.  Once they have begun, the beer garden operator has a financial stake in continuing, and the factory owner will extract a higher cost to change its operations.  Ex post negotiations are thus far more likely to result in blackmail.

Manhattan's Worst Eyesore?

Sid illustrates this convincingly in the context of severance packages and non-disclosure agreements.  If a company adds a non-disclosure agreement to its basic employment agreement, the employee will extract no consideration for her silence because she is negotiating in the context of a competitive market.  Absent such a non-disclosure agreement, the company may have to offer consideration in exchange for a release of claims and disclosure of information or face threats of disclosure.  The law would frown on the latter, but that does not mean that the company might not negotiate a severance package that would include a now more pricey non-disclosure agreement negotiated in the context of a bilateral monopoly.  The same is true in agreements among neighbors.  Negotiating ex ante limitations on property uses with spillover effects is far less costly than negotiating the removal of a nuisance or eyesore.  

I would be interested in hearing Sid's response to arguments from Tess-Wilkinson-Ryan and David Hoffman that non-disclosure agreement impose social costs by forestalling discovery of harmful business practices.  I am guessing that Sid's response is that his model simply doesn't apply in the context of ex ante commitments not to expose unlawful conduct.  But I wonder if there are not non-disclosure agreements that cover conduct that is awful but lawful that are foisted upon employees at a time when they are ill-equipped to protect their own interests or the public interest.

Sid's thought-provoking article just begins the work of cataloguing its potential significance.  He notes that parties could negotiate their way out of positive injunctions, and courts could uphold such settlements up to the point at which the payments demanded become extortionate.  The challenging law of substantial performance becomes much easier if we can determine the reasonable ex ante price for completed performance.  From this perspective, the court's requirement of the $60,000 cost of completion in Groves v. John Wunder Co. seems extortionate, given that the value of the land was only $12,000.  I would like to think that Sid would side with Judge Cardozo in Jacobs and Young v. Kent.  But I think Peevyhouse remains a tough case because of the willfulness of the breach of the non-economic value of the property to the Peevyhouses.  I wonder how Sid thinks Alaska Packers should have come out, if we think of that case as involving an improper threat. If the workers had overcome their consideration problem by offering to reduce their take per fish caught in exchange for $100 in base pay, would that have been improper blackmail or lawful bribery?  

As usual, Sid has given me a lot to think about and a lot of novel takes on contracts doctrine that I can share with my students.  Sid is cautious and does not overreach.  He acknowledges that his unjust enrichment approach will not suit every case, and the prohibition on threats might retain some usefulness, despite its over- and under-inclusiveness, in deterring deliberate, knowingly extortionate threats where the costs of forbearance are hard to calculate.

Weekend Frivolity: Not Feeling Very Frivolous this Weekend

Tuesday Top Ten - Contracts & Commercial Law Downloads for February 22, 2022

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 24 Dec 2021 - 22 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	682
2.	The Cryptic Case of the CryptoPunks Licenses: The Mystery Over the Licenses for CryptoPunks NFTs Edward Lee Chicago-Kent College of Law - Illinois Institute of Technology	530
3.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	302
4.	K is for Contract―Why is it, Though? Hanjo Hamann Max Planck Institute for Research on Collective Goods	295
5.	Other Judges' Cases Melissa B. Jacoby University of North Carolina School of Law	250
6.	Choice of Law in the American Courts in 2021: Thirty-Fifth Annual Survey John F. Coyle, William S. Dodge and Aaron D. Simowitz University of North Carolina School of Law, University of California, Davis - School of Law and Willamette University College of Law	239
7.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	202
8.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	187
9.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	164
10.	Varieties of AI Explanations Under the Law. From the GDPR to the AIA, and Beyond Philipp Hacker and Jan-Hendrik Passoth European University Viadrina Frankfurt (Oder) - European New School of Digital Studies and European University Viadrina Frankfurt (Oder) - European New School of Digital Studies	147

 

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 24 Dec 2021 - 22 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	682
2.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	302
3.	K is for Contract―Why is it, Though? Hanjo Hamann Max Planck Institute for Research on Collective Goods	295
4.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	202
5.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	187
6.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	164
7.	Who Has the Power to Enforce Private Rights? Rebecca Stone University of California, Los Angeles (UCLA) - School of Law	124
8.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	117
9.	Private Law Rights as Democratic Participation: Kelsen on Private Law and (Economic) Democracy Helge Dedek McGill University - Faculty of Law	95
10.	COVID-19 Aggregate Litigation: The Search for the Upstream Wrongdoer Robert H. Klonoff Lewis & Clark Law School	89

 

Teaching Assistants: Victor Goldberg on Tacit Assumptions and Consequential Damages

This is the seventh in a series of posts on Victor Goldberg's work.  Today's post is about Chapters 8-10 of his book, Rethinking Contract Law and Contract Design (RCL).  Links to other posts follow this post.

Site of the dramatic events in Hadley

Everybody hates the tacit assumption doctrine, except for New York State (sort of), three of the Law Lords in The Achilleas, Oliver Wendell Holmes, and Professor Goldberg.  The doctrine is an alternative to the dominant rule on consequential damages (from Hadley v. Baxandale) that such damages must be within the contemplation of the parties at the time they entered into the contract.  The tacit assumption seeks to determine whether it would be commercially reasonable to assume that the damages at issue were an unspoken assumption of the parties.  Professor Goldberg points out that tacit assumptions abound in modern contracts law, as evidenced by courts’ welcoming attitude to extrinsic evidence relating to course of performance, course of dealing, and usage of trade.  We seem to assume that damages are different, but this is an unreasoned sentiment (RCL, 87-90).  

In general, Professor Goldberg proposes two situations in which the parties might provide for the recovery of consequential damages in negotiated contracts.  The first would be based on the gross negligence or willfulness of the non-breaching party.  He justifies this exception to the general limitation on consequential damages in terms of the tradeoff between flexibility and reliance discussed in Chapter 2: “For innocent mistakes the onus is on the buyer to protect itself,” Professor Goldberg maintains, but they should not have to protect themselves against behaviors by the seller “outside the buyer’s reasonable expectations” (RCL, 93-94).  The second exception is where parties stipulate in advance to the seller’s liability for foreseeable consequential damages, as they might do in the context of a long-term relationship like those between suppliers of auto parts and the automobile manufacturers (RCL, 94-95).

Albright-Knox Art Gallery, Buffalo, NY

Professor Goldberg next, in Chapter 9, covers Kenford Company v. Erie County through five rounds of litigation that spanned two decades.  A $500 million claim ultimately yielded a $10 million verdict based on what the court styled reliance damages, but there were a lot of interesting twists and turns along the way.  The case involved what now seems like a quixotic scheme to build a domed stadium in Buffalo for the Bills that might also house a baseball team looking for a new venue.  The Washington Senators and the New York Yankees were both potential future tenants.  The author of the scheme was Edward Cottrell, operating through the Kenford Company, who owned the land on which the stadium was to be built.  The basic deal was that Kenford would loan a parcel of land to Erie County for the purposes of building the stadium. In exchange, he would get a 40-year lease of on the stadium and profit from management fees and from enterprises he would build on the surrounding property.  The deal fell through when construction estimates for the stadium greatly exceeded estimates.  The County backed out, and Cottrell was unable to secure financing without the County’s support (RCL, 97-101).  The parties seemed never to have contemplated such an eventuality, and their five-page contract covering everything but the management agreement gave the courts little to work with.

As the husband of a proud daughter of the City of Good Neighbors, I was intrigued by the possibility that a domed stadium for the Bills might also be enough to entice the Yankees to leave the Bronx for Erie County.  If George Costanza could be part of the Yankees organization, why not the city of Buffalo?  Unfortunately, even though the Yankees were up for sale for a mere $12 million, Buffalo failed to lure them to the Queen City of the Lakes, as its attempt sailed wide right.

From Professor Goldberg’s perspective, the courts made myriad mistakes in their approach to damages.  They treated the damages from the breach of the management contract as consequential damages when they were in fact direct damages.  The management contract was the consideration for the donated land, and so the question should have been value of that land (perhaps $200,000) and not some speculative $58 million estimate that Cottrell’s experts had concocted (RCL, 108-09).  In their approach to lost profits, the New York Court of Appeals applied the new business rule, which turns on the speculative nature of estimates of a new venture’s potential profitability.  The new business rule might make sense.  However, as Professor Goldberg points out, the reason, at least in cases like Kenford should not turn on the speculative nature of the damages but on the economics concept of opportunity costs.  The question is not what profits the new business would have generated but the extent to which those profits exceeded those of an alternative venture into which the non-breaching party could have invested its resources (RCL, 108).  Professor Goldberg regards all of Kenford’s extravagant claims of lost profits with a jaundiced eye.  If the deal was so lucrative, why was Kenford unsuccessful in securing financing (RCL, 100)?  Whence came Kenford’s expert opinion that the company would have made $140 million by buying “a baseball franchise at its fair market value” (RCL, 109)? 

The tacit assumption doctrine arose in Round 5, as New York’s Court of Appeals attempted to calculate the lost appreciation of the lands surrounding the site of the now-defeated stadium.  The Court of Appeals seemed to adopt the tacit-assumption approach, but the assumptions of the parties were hard to discern given that the contract was only five pages long.  The Court of Appeals resorted to what Professor Goldberg terms “proof by adjective,” finding it both “irrational” and “illogical” to think that the County would have assumed the risk of Cottrell’s loss from failure of the land to appreciate in value in case the stadium never got built (RCL, 111).  And so, the Court of Appeals applies the tacit assumption doctrine in Kenford, only to find that no tacit assumption could be shown.  In later cases, the Court seemed to backtrack both from the tacit assumption doctrine and from the new business rule (RCL, 113).  Neither should have been an issue in Kenford.  Had the County only drafted a proper contract, including a termination for convenience clause and a clause making performance contingent on financing, it could have saved itself decades of litigation (RCL, 111). 

Finally, Professor Goldberg discusses the tacit assumption in the context of the House of Lords’ decision in The Achilleas.  Professor Goldberg provides a fascinating discussion of the risks involved in ship chartering.  The reliance/flexibility calculation is especially challenging in this context.  A typical charter may last six months.  During that time, the charterer will pay a fixed daily price for the use of the ship and its crew.  But timing the “last voyage” so that one can return the vessel in time can be tricky (RCL, 117-24).  As Richard Wagner put it, Wer baut auf Wind baut auf Satans erbarmen.  Well, maybe the problem is no longer wind, but the point is, sea travel involves a lot of uncertainty.  

The parties can allocate risk with careful contract language, but (no surprise here) the language of the contract governing The Achilleas was ambiguous.  Through no fault of the charterer, the ship was returned eight days late.  As a result, it arrived too late for the ship to be available for its next charterer.  In the meantime, the price had dropped, and the new charterer negotiated a 20% discount on its four-month charter.  The owner sought to recover the costs of that discount, which amounted to $1.36 million.  The charterer sought to limit damages to the daily fee it negotiated for its charter multiplied by the eight days it was late, which came to less than $160,000 (RCL, 125). 

The Lords unanimously found for the charterer.  Three Lords embraced the tacit assumption approach, attempting to ascertain the intention of the parties. It would make no sense for the charterer to assume a risk that it could not control.  The next charter might be for four months or for two years, and the rates for time charters were volatile.  Lord Rodger of Earlsferry and Baroness Hale found that the unusual market volatility at the time was an unforeseen occurrence, rendering the consequential damages too remote (RCL 127-28).

Professor Goldberg opposes the language in the Hadley canon of foreseeability or remoteness, although he harbors little hope of dislodging this formulation from the vocabulary of consequential damages jurisprudence.  In his view, it makes more sense to consider the parties’ degree of control over the outcome, and the tacit assumption approach better facilitates that analysis.  There will always be some indeterminacy under this approach, but the tacit assumption narrows the zone of indeterminacy by considering what liability risks rational actors in the position of parties would have assumed.  In The Achilleas, the owner negotiated a new charter after the first charterer had set its last voyage.  The owner controlled the timing and so it makes no sense to put the burden of liability on the first charterer, whose last voyage was delayed, as happens, for reasons beyond its control (RCL, 132).

What is remarkable about the time charter line of cases is that there is a time charter line of cases.  The last voyage problem is well known.  There are straightforward solutions.  The parties can allocate risk in a limited number of ways.  Instead, they rely on form contracts with convoluted language that leaves it up to courts to determine whether the parties allocated the risk of consequential damages or, if the court adopts the tacit assumption approach, how the parties likely would have allocated risk had they bothered to reduce their assumptions to writing (RCL, 133). 

A post on Chapter 7 (liquidated damages) is here.

A post on Chapters 5 & 6 (speculative damages) is here.

A post on Chapter 4 (lost-volume damages) is here.

A post on Chapter 3 (timing for assessing damages) is here.

A post on Chapter 2 (the flexibility/reliance trade-off) is here.

The introductory post is here.

Weekend Frivolity: Do Haircuts Come with Warranties?

There is so much wisdom in this scene!  Fleabag seems to have the upper hand with her "Hair is everything" soliloquy.  But then Antony's last line carries the day, leaving Fleabag and Claire with a shamed "Sorry, Antony," and a plaintive, confirmatory, "See you next week?"

If you haven't watched this show and you don't mind explicit stuff, foul language, uncomfortable silences, more explicit stuff, or smoking, it is a work of genius.  Very conceptual and yet also engaging, with absolutely brilliant performances, especially by Phoebe Waller Bridge, but Olivia Coleman gives her a run for her money.  Phoebe Waller Bridge performs Meryl Streep-level acting just using her eyes, editing, and camera angles.

Judge Orders Specific Performance in the Sale of Two Hospitals

According to this report from the Daily Local News website, a judge ordered Tower Health to sell two hospitals in West Chester Pennsylvania (whose courthouse is pictured at left) to Canyon Atlantic Partners, ordering the seller to complete a deal from which it had tried to pull out.  According to the report, the court's order (which I have not seen) sides with Canyon Atlantic, but also cites the public interest in ordering specific performance of the sale.

One might think that the harm to Canyon Atlantic, a Texas-based firm, from Tower Health's breach could be remedied with damages.  However, the court notes,

The hospitals provide significant health resources for Chester County and its citizens. The hospitals are critically important to their local communities. The impact of the hospital closures spreads beyond the local community. Neighboring hospitals will be overburdened rendering health resources scarcer to a greater community.

Tower Health just bought the two hospitals, along with a third, in 2017 for $423 million.  It announced last Fall that it was going to close the two hospitals, at which point Canyon Atlantic offered to buy them for $16.5 million. Tower Health was not especially forthcoming about its reasons for trying to terminate the deal.  Some more generous offers may have come along.  Nobody seems very impressed by Tower Health's conduct.  It underestimated the sticky grasp of contractual obligations.

H/T David Hoffman, aka @HoffProf

Comedians' Suit Against Pandora Is No Joke!

According to Rolling Stone Magazine, the estates of some comedians, as well as some comedians who are still alive, are suing Pandora for breach of copyright.  Robin Williams' estate is seeking over $4 million; George Carlins' estate is seeking $8.4 million.  All together, five comedians have filed suit seeking over $40 million collectively.  

Rolling Stone quotes from the complaint:

While it is commonplace in the music industry for companies like Pandora to enter into public performance licensing agreements with performance rights organizations like BMI and ASCAP for musical compositions, these entities do not license literary works. Therefore, it was the responsibility of Pandora to seek out the copyright owners and obtain valid public performance licenses.

The comedians' record labels have shared their recordings on Pandora.  However, the comedians claim, the recordings are separate from the jokes, which remain the intellectual property of their creators.  As Variety explains here, the comedians claim "that they should be treated like singer-songwriters, earning a separate royalty for the underlying 'literary work' in addition to the performance of it."  

Just a quick anecdote about Robin Williams.  I saw him perform live stand-up in San Francisco.  I think it must have been in the late 1980s.  I went with a friend to a comedy club.  At the end of the scheduled performances, the M.C. got up and said, "Hey, Robin Williams is here, and he wants to do a set.  Do you all want to stick around and give him a listen?"  It was late, but it was Robin Williams.  We indicated our enthusiastic assent.  

He was clearly excited to try out some material.  He had more energy than the small space could contain.  The material was raw.  Most of the jokes didn't fly.  He was sweating and agitated.  After about ten minutes, the M.C. came back and, apologizing to Robin Williams, said that by city ordinance, he had to stop.  I guess they were already past the time when comedy clubs were supposed to shut down.  Robin Williams pleaded, could he do one more bit?  The M.C. allowed it.  It was Robin Williams.  The last bit wasn't much better than the others, but he was trying so hard.  He attempted to engage in "safe comedy" by placing a condom over the microphone.  Edgy?  In desperation, the club cut the lights and the mike.  It seemed there was no other way to get him to stop.

It was not the best stand-up I've ever seen, but it was certainly the most memorable.  I loved that he was still so eager for an audience, that he was still so hungry to create new comedy, and ultimately that he, by that time, rich beyond imagining, possessing iconic fame, was still so naked and vulnerable and pathetically desirous of our approval.   

Watching Robin Williams cover himself in inglorious flop-sweat reminded me of Robert Musil's essay, Flypaper.  Musil observes the moment when the flies stop struggling to escape the flypaper's grasp and relax a bit into their fate, freezing in ridiculous poses.  "They no longer hold themselves up with all their might, but sink a little, and at that moment appear totally human."  Never did I see anyone look more human than Robin Williams did as he utterly bombed in a San Francisco comedy club.  

Tuesday Top Ten - Contracts & Commercial Law Downloads for February 15, 2022

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 17 Dec 2021 - 15 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	665
2.	The Cryptic Case of the CryptoPunks Licenses: The Mystery Over the Licenses for CryptoPunks NFTs Edward Lee Chicago-Kent College of Law - Illinois Institute of Technology	490
3.	K is for Contract―Why is it, Though? Hanjo Hamann Max Planck Institute for Research on Collective Goods	270
4.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	237
5.	Other Judges' Cases Melissa B. Jacoby University of North Carolina School of Law	217
6.	Choice of Law in the American Courts in 2021: Thirty-Fifth Annual Survey John F. Coyle, William S. Dodge and Aaron D. Simowitz University of North Carolina School of Law, University of California, Davis - School of Law and Willamette University College of Law	215
7.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	192
8.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	184
9.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	156
10.	Varieties of AI Explanations Under the Law. From the GDPR to the AIA, and Beyond Philipp Hacker and Jan-Hendrik Passoth European University Viadrina Frankfurt (Oder) - European New School of Digital Studies and European University Viadrina Frankfurt (Oder) - European New School of Digital Studies	12

 

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 17 Dec 2021 - 15 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	665
2.	K is for Contract―Why is it, Though? Hanjo Hamann Max Planck Institute for Research on Collective Goods	270
3.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	237
4.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	192
5.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	184
6.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	156
7.	Who Has the Power to Enforce Private Rights? Rebecca Stone University of California, Los Angeles (UCLA) - School of Law	118
8.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	112
9.	Private Law Rights as Democratic Participation: Kelsen on Private Law and (Economic) Democracy Helge Dedek McGill University - Faculty of Law	90
10.	COVID-19 Aggregate Litigation: The Search for the Upstream Wrongdoer Robert H. Klonoff Lewis & Clark Law School	81

Spice DAO and the $3million Dune art book

I haven’t been blogging much because I have another new prep this semester – Copyright!  I’m delighted to be able to teach the subject which I’ve been wanting to do for years.  I’ve been keeping my ears open for good copyright/contracts news to blog about and thought I'd share this one. 

A few weeks back, an anonymous blockchain collective called Spice DAO (decentalized anonymous organization) acquired at auction a rare art book, Jodorowsky’s Dune, which was a guidebook to a film adaption of Dune (but not that film adaptation).*  It’s a little confusing, but according to this Esquire article, in 1974, director Alexander Jodorowsky wanted to make a film adaption of Dune but due to a variety of funding issues, including Salvador Dali’s desired salary of $100,000 per minute and roles for Orson Welles and Mick Jagger, that film was never made.  Jodorowsky also created a book which includes a storyboard by Moebius, a pseudonym for the French artist and cartoonist, Jean Giraud.  Rumor has it that less than twenty copies of this book are in circulation.  Last fall, Christie’s auctioned a copy and Spice DAO surprised everyone by bidding $3million when the appraisers had expected that it would sell for, oh, $40,000. 

But Spice DAO wasn’t planning to just flip through the pages and admire the lovely artwork.  No, they had plans -- BIG plans! For one thing, they were going to make the book public!  They were also going to issue NFTs based on the book, then burn the book and record it on video that they would then turn into an NFT!  They also planned to create an animated series based on the book!

Only their $3million purchase only bought them a copy of the book, not the copyright to the book, which meant that they didn’t actually have the right to do any of that stuff (i.e. create derivative works).  Plus the book was already public.

Spice DAO (and please refrain from calling them Spice D’OH! Because that would just be hitting someone when they’re already down $3million) is still charging ahead with somewhat modified plans, but I don't think they will be able to carry through with them if they aren’t able to acquire any licenses from the copyright holders. 

I also briefly ran through potential contract defenses (unilateral mistake?  unconscionability?  breach of warranty?)  but none of them seem to apply.  Maybe there’s some fine print on the Christie’s auction contract that might help them?

Their best bet, IMHO, is to turn these really sour lemons into lemonade by writing a movie about a band of crypto investors who end up buying a copy of a book under an assumption that turns out to be completely false.  The entire Internet mocks them but they put on a brave face and carry on because after all, haters gonna hate!  The experience causes them to make dramatic changes to their lives. One of them even becomes a copyright and contract lawyer, reading fine print on behalf of their impulsive but enterprising clients.  What the world doesn't yet realize is that this is what marks the beginning of Web 3.0 and a brave new metaverse where nothing makes sense anymore.  Hijinks ensue. 

*Dune was eventually made into an epic movie (which I have yet to see) and it was recently nominated for ten Oscars, including for best picture. 

Thinking About Disclaimers

I'm not a fan of disclaimers, and yet my instincts diverge in two cases that I taught last week and this week.  My students' instincts, no more consistent than mine, tend in the opposite direction in both cases.  My hunch is that the differences in our instinctual responses turn on the value we place on the underlying activities in the cases.

Last week, in contracts, I taught McCune v. Myrtle Beach Indoor Shooting Range.  In that case, the plaintiff signed a release before participating in a paintball game at defendant's facility.  Defendant disclaimed liability for its own negligence.  Plaintiff was given an ill-fitting protective mask.  The facility's staff tried several times to adjust it, but it remained loose.  She snagged it on a tree brach, leaving her face exposed, and at that point, she was hit with a paintball pellet, leaving her legally blind in one eye.

My students were pretty unanimous in agreeing with the court's finding that plaintiff had assumed the risk, and they thought the release ironclad.  I don't disagree with that outcome on the law.  The release she signed included the following language:

The risk of injury from the activity and weaponry involved in paintball is significant, including the potential for permanent disability and death, and while particular protective equipment and personal discipline will minimize this risk, the risk of serious injury does exist.

That is admirably clear, but I asked my students whether, as a matter of policy, we should allow facilities that acknowledge that the activities that they host are dangerous to disclaim liability for their own negligence.  I think the answer is clearly no.  No students joined my side.  Those who spoke either thought that paintball is fun and that I was being a killjoy, or they thought that paintball is stupid, and those who decide to participate assume the risk of injury.  I suggested that if we did not allow such disclaimers of liability as a matter of public policy, we would force the paintball venues to take reasonable precautions and insure against harms rather than socializing the costs of their own negligence.  Howls of outrage, or at least, not a lot of love.

This week, I am teaching Bell Sports v. Yarusso in Sales.  In that case, plaintiff was injured while riding at dirt motocross track.  He was thrown from his bike and landed on his head.  The helmet did not protect him enough to prevent an injury that rendered him a quadriplegic.  

The court held Bell Sports to what it construed to be a warranty: 

[T]he primary function of a helmet is to reduce the harmful effects o a blow to the head . . .  The [helmet] is designed to absorb the force of a blow first by spreading it over as wide an area of the outer shell as possible, and second by the crushing of the non-resilient inner liner.

The same document also repeatedly warned that "NO HELMET CAN PROTECT THE WEARER AGAINST ALL FORESEEABLE IMPACTS."  

The court found that Mr. Yarusso was "catapulted over the handlebars of the motorcycle" and "landed on his head."  The impact caused his C5 disc to "explode" in the spinal cord and other disks.  Because this was a warranty case, negligence was not an issue.  There was no requirement that the plaintiff show that a better design was possible.  It did not matter that the helmet may not have been intended for off-road use and that it failed to protect Mr. Yarusso completely because it was designed to absorb impact with asphalt rather than packed dirt.  

My instincts about assumption of risk now flip.  Bell was not negligent.  It is not clear to me that any warranty was breached.  Bell never promised that Mr. Yarusso could not be injured while wearing the helmet.  On the contrary, it only warranted that the helmet would reduce the harmful effects of a blow to the head.  That it surely did; just not enough to prevent Mr. Yarusso's injury.   

My experience in teaching the case thus far is that my students' sympathies are with Mr. Yarusso.  I wonder why they think the law should provide damages to Mr. Yarusso but not to Ms. McCune.  Unlike Bell, the defendant in the McCune case controlled the environment in which plaintiff was injured.  Unlike Bell, the defendant in the McCune case was negligent.  I surmise that the dangers that Mr. Yarusso assumed were far more significant than the dangers from paintball, and the dangers from paintball seem far more easily avoidable with ordinary care.  Neither activity (paintball and motocross) has any appeal for me, but at least Bell tried to protect Mr. Yarusso, and I don't know what it could have done differently.  To the extent the indoor shooting range attempted to help Ms. McCune, it failed, and it seems like what is lacking is any motivation to exercise ordinary care.  That, in my view, is where public policy needs to step in.

Ultimately, I can't say that either case was wrongly decided.  Although the cases raise similar questions about assumption of risk, McCune turns on disclaimers of liability in connection with releases, and Yarusso turns on warranty liability.  The court in Yarusso seems to have treated the limiting language in Bell's warranty as an attempted disclaimer, and that may be right.  The jury made a determination of liability in the case which the Delaware Supreme Court found adequately supported in the record.

Weekend Frivolity: The Anniversary of the Best Thing to Come of the Pandemic

The pandemic has brought us experiences that we would not have encountered without it.   This week is the anniversary of one of the best.  It still makes me laugh.

 

Tuesday Top Ten - Contracts & Commercial Law Downloads for February 8, 2022

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 10 Dec 2021 - 08 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	610
2.	Philosophy of Contract Law Daniel Markovits and Emad H. Atiq Yale Law School and Cornell University - Law School	266
3.	The Internal Point of View in Private Law Jeffrey A. Pojanowski and Paul B. Miller Notre Dame Law School and Notre Dame Law School	222
4.	The Mystery of the Missing Choice-of-Law Clause John F. Coyle University of North Carolina School of Law	202
5.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	200
6.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	189
7.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	177
8.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	150
9.	South Korean Company Law －Case Studies and Comparative Law Analysis with the US Heejoo Kim and Hiroyuki Watanabe Waseda Business School and Waseda University	108
10.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	105

 

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 10 Dec 2021 - 08 Feb 2022

Rank	Paper	Downloads
1.	Assembly-Line Plaintiffs Daniel Wilf-Townsend University of Chicago Law School	610
2.	The Mystery of the Missing Choice-of-Law Clause John F. Coyle University of North Carolina School of Law	202
3.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	200
4.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	189
5.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	177
6.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	150
7.	Who Has the Power to Enforce Private Rights? Rebecca Stone University of California, Los Angeles (UCLA) - School of Law	113
8.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	105
9.	Private Law Rights as Democratic Participation: Kelsen on Private Law and (Economic) Democracy Helge Dedek McGill University - Faculty of Law	87
10.	Data Protection Issues for Smart Contracts W. Gregory Voss TBS Business School	80

Teaching Assistants: The Problem of Liquidated Damages in Carborundum

This is the sixth in a series of posts on Victor Goldberg's work.  Today's post is about Chapter 7 of his book, Rethinking Contract Law and Contract Design (RCL).  Links to other posts follow this post.

In Lake River Corp. v. Carborundum, Lake River invested $89,000 in a bagging machine so that it could bag Carborundum’s product.  Over a three-year period, Lake River was to bag at least  22.5 tons of Ferro Carbo for a fixed contract price of $533,000.  In order to protect Lake River’s investment, the parties agreed that, even if Carborundum sent less than the contractual minimum of Ferro Carbo for bagging, it would still pay the contract price.  Carborundum did not provide the minimum quantity for bagging, and Lake River sought to enforce what the parties and the courts treated as a liquidated damages clause.  Judge Posner, while of course expressing his skeptical view of the bar on excessive liquidated damages, did what the common law of Illinois required.  Having calculated Lake River’s damages under the liquidated damages clause as exceeding damages flowing from breach regardless of when the breach occurred, Judge Posner dutifully struck the clause as a penalty (RCL, 71-77).

One might expect Professor Goldberg to criticize the case for confining sophisticated parties to the procrustean bed of traditional common-law remedies.  They bargained for a price for Carborundum’s breach.  Why shouldn’t the courts enforce that option price?  But that is not his only take-away from the case.  This is another case where the courts failed to understand the facts and thus the economics behind the deal.  No shade on Judge Posner; the parties did not understand their own deal, and Judge Posner had to work with what he had. 

When we look at additional clauses from the contract, which was an appendix to Lake River’s brief, we see that Carborundum paid for flexibility.  If it needed Ferro Carbo bagged, Lake River stood ready to do so.  Because Lake River had incurred costs, it demanded a minimum payment of $533,000.  If it bagged more than 22.5 tons of Ferro Carbo, it would be paid more.  But Lake River's costs were not limited to the $89,000 bagging machine.  It set aside space at its plant, it hired additional personnel to run the bagging operation, and it was constrained in its allocation of resources because it had to stand ready, for three years, to bag up to 400 tons of Ferro Carbo per week (RCL, 77-79).  Such costs are very difficult to calculate and thus are an appropriate subject matter for a liquidated damages provision (RCL 80-81).  That is especially the case here, where Carborundum did not provide notice of anticipatory breach; Lake River never had an opportunity to offset its damages with the resources it could have freed up had it received such notice (RCL, 82-83).

Judge Posner (left) considered but rejected the idea of treating this case as similar to “take-or-pay” provisions we see in extractive industries.  Such provisions are appropriate, Judge Posner reasoned, only when the supplier’s fixed costs constitute a large fraction of the total costs.  Professor Goldberg disagrees.  High fixed costs are a sufficient but not a necessary ingredient of take or pay provisions (RCL, 81).  I wonder whether pay-or-play provisions, discussed in chapter 2 of the book. provide a useful analogy.  Sandra Locke did not have high fixed costs in her deal with Warner Brothers, but had Warner Brothers breached by not paying her the $1.5 million owed under their agreement, the courts would not have allowed Warner to argue that the contract price was an unenforceable penalty clause.  In a typical pay-or-play scenario, the payor wants to have the payee available, and they may also want to render the payee unavailable to rivals.  Flexibility is a contractual right for which one can bargain.  Carborundum seems to have bargained for such a right here, and the so-called liquidated damages clause represents the price that Lake River demanded to protect its reliance interest.

Professor Goldberg concludes that the $533,000 contract price and minimum quantity clauses were not damages provisions but simply set the price for the service Lake River provided, for a three-year period, to Carborundum.  However, as noted above, even if the clauses were treated as liquidated damages provisions, they should have been upheld.  Here, as in many cases, Professor Goldberg advises, courts should get out of the way when sophisticated parties create their own remedies (RCL, 83).

A post on Chapters 5 & 6 (speculative damages) is here.

A post on Chapter 4 (lost-volume damages) is here.

A post on Chapter 3 (timing for assessing damages) is here.

A post on Chapter 2 (the flexibility/reliance trade-off) is here.

The introductory post is here.

A Roseanna Sommers Two-Fer: Research that Will Change Your Views of Consent and Deception

Roseanna Sommers (right) is an Assistant Professor at the University of Michigan Law School.  She is on our radar for two reasons today.  First, over on Jotwell, our own Nancy Kim has published a comment on Professor Sommers' Contract Schemas, available on SSRN.  The article, as Nancy summarizes it, makes for depressing reading from the perspective of a contracts professor.  Professor Sommers draws on empirical research in which non-lawyers are asked about what they think of when they think of contracts.  It's not good. 

Ordinary people might hate contracts more than they hate the government.  More than they hate dentists.  More than they hate people who use "fulsome" to mean comprehensive.  According to Sommers' research, people associate contracts with dense, fine-print boilerplate that they will never understand but which they are bound by once they sign, even if they are deceived into signing.  Lay people are apparently not conversant with affirmative defenses to contracts liability.   

Sidebar: I think these lay instincts are not far off.  If you are deceived into a contractual commitment, you are not likely to be able to bring a successful suit avoiding the contract based on an affirmative defense.  Rarely is the suit worth the hassle and expense.  Still, in many cases, you could return the goods and get a refund, either because the vender knows that it would lose on the law, or (more likely) because it's bad business to allow ill will to fester in the consuming community.  However, in cases of real scams, the law is likely of little use, because the scammer is operating through shells, and even if you could identify them, they are likely judgment-proof.

Second, Professor Sommers is also featured on the latest episode of Felipe Jimenez's Private Law Podcast, about which we have blogged about before here and here.  In the episode, Professor Sommers discusses her forays into experimental jurisprudence.  That is, she does empirical work that uncovers lay people's understanding of legal terms, like "consent" or "reasonableness."  The approach is similar to that of Tess Wilkinson-Ryan and David Hoffman, back before they became podcast co-hosts and, and as a result, Kardashian-level international celebrities.

One shocking result of Professor Sommers' research is that people regularly consent to things to which similarly-situated people say that they would not consent.  That is, Professor Sommers' sweetly asks her research subjects, "Would you unlock your phone and let a researcher take it into another room to check on something?"  People say they would not.  But in the context of her IRB-approved research, she asks research subjects to do that very thing, and over 90% consent.  More alarming still, people are extremely reluctant to withdraw consent once they have given it.  Once in medias res, people do things that they would not agree to do if the full extent of what was being asked of them were disclosed ex ante.  As Nancy suggests in her review referenced above, Professor Sommers' research gives us additional reasons to regard with a jaundiced eye claims of consumer consent to boilerplate contractual terms.

As Professor Sommers and friend-of-the-blog, Meirav Furth-Matzkin argue in Consumer Psychology and the Problem of Fine-Print Fraud, lay people do not know that consent can be withdrawn.  They think that if they sign a contract they are bound, notwithstanding deception.  Manipulative venders rely on the in terrorum effect, and they can get away with it because consumers do not think they have any recourse when they are tricked into signifying assent to contractual terms. 

Professor Sommers' scholarship also reaches across doctrinal areas to test our notions of consent in very different contexts.   In Commonsense Consent, Professor Sommers looks at deception in the context of sexual relations, police investigation and interrogation, medical procedures, research with human subjects, and contracts.  Her research provides fascinating results, the fulls impact of which is a bit hard to sort out.  For example, feminists worked for decades to transform our understanding of rape from being associated exclusively with violence and threats of violence to being associated with power.  But courts (and common intuitions) do not treat people who are tricked into having sex, for example by people lying about their marital status, as sexual assault victims.  They do recognize sexual assault-by-deception in cases where the sex itself is misrepresented; for example, when medical professionals commit sex acts disguised as procedures or when people trick others into sex by concealing their identity.  We may have changed laws to eliminate use of force as an element of sexual assault, but the coercion/deception distinction makes it hard to prosecute sexual assault by deception.  When you couple that with Professor Sommers' results indicating that people do not realize that consent can be withdrawn, Antioch College's "infamous" sexual assault policy doesn't look so "ridiculous" after all, if it ever did.

Our tendency to think that deception does not negate legal consent is also relevant in many police contexts, as police can intentionally  engage in all sorts of deception, short of quid-pro-quo threats, and such chicanery will not invalidate inculpatory statements.  Similarly, Professor Sommers' research indicates that people do not think that consent to medical procedures is negated by medical professionals' misrepresentations in connection with those procedures.  Consumer protection faces difficult challenges when it bumps up against common-sense understandings of consent, which tend to be quite broad.

While scholars have puzzled about the distinction the law makes between fraud in the inducement and fraud in the factum, Professor Sommers' research suggests that the legal distinction builds on common-sense intuitions.  That insight does not justify giving legal effect to the distinction, but it does help explain its origins and longevity.

Give a listen to this podcast.  Whether you do contracts law, criminal law, sexual assault and workplace harassment law, or health law, you will find much to contemplate in Professor Sommers' contributions.  it will be an hour very well spent!

Weekend Frivolity:* This Is About Love for Bill Murray and Groundhog Day

Not about whatever stupid vehicle this ad is trying to get us to buy.

Frivolity may not have any contracts-related content.

Big Tech TOS and Facebook's Plunge

Facebook's stock plunged 26% on forecasts of weaker than expected revenue for the next quarter.  One big reason?  Apple's changes to protect user privacy (Thank you, Apple) which require that users opt-in to Facebook tracking.  Facebook claims that Apple's iPhone privacy changes will result in a $10billion revenue hit.  For years, some academics and marketing advocates have claimed that users really like tracking or at least, don't really mind it- if they didn't, they asked, why would they line up to buy iPhones?  That was not the soundest logic given the reams of research regarding consumer psychology and human cognitive limitations.  Others, including myself, contended that consumers didn't like tracking and data collection, but didn't have much of a choice or weren't really focused on the issue.  Well, I think the numbers don't lie here - people, when given the choice, really don't want to be tracked, and Facebook's bottom line is feeling it.

The tracking issue is inextricably tied to the TOS problem.  Companies justify practices like data collection and tracking by claiming that consumers "consented" to the practices in their terms of service.  But consumers don't agree to the terms because they don't mind the practice (despite what some might say) - they do it because they don't have a real alternative.  A while back, I spoke with Justin Kirkland, a reporter from Esquire magazine, who captured the issues related to Facebook's (and other Big Tech companies) terms of service in this amusing article.

* yes, I know that Facebook changed its name to Meta, but everyone knows they're still Facebook.

Teaching Assistants Jeopardy: Speculative Damages for $100

This is the fifth in a series of posts on Victor Goldberg's work.  Today's post is about Chapters 5 & 6 of his book, Rethinking Contract Law and Contract Design (RCL).

A post on Chapter 4 (lost-volume damages) is here.

A post on Chapter 3 (timing for assessing damages) is here.

A post on Chapter 2 (the flexibility/reliance trade-off) is here.

The introductory post is here.

And now on to Jeopardy:

The answer is: One case, two chapters in RCL, and six pennies.

Question: What is Freund v. Washington Square Press? 

It is not clear why Freund has become a favorite of casebooks.  Its subject matter, a professor suing a publishing house for breach of contract, likely speaks to the interests of instructors more than it does to those of students.  We can all feel deeply the pathos of the moment when Freund prevails on the merits and is awarded only nominal damages of six cents.  Thus the value of our academic toils is  reckoned in this world.  In the hereafter however, . . . one can hope. 

As Professor Goldberg explains in Chapter 5 of RCL, Freund fits into his theme of courts getting the basic facts of a case wrong.  Freund stands for the proposition that a plaintiff cannot collect damages when any calculation of damages would be speculative.  In this case, Washington Square Press (the Press) breached a contract to publish Freund's book about Eugene O'Neill.  There were lots of reasons to think it would be hard to figure out what royalties Freund could have made had the Press made good on its promise to publish his book.  However, the bigger point is that Freund did not seek such royalties.  He sought specific performance and damages for harm to his career as a tenure-track professor. 

He could have published his book himself (he was a publisher as well as an author), but he wanted the prestige associated with publication by the Press's acquirer, Simon and Schuster.  Also, the terms of the contract seem to indicate that the Press had negotiated for an option to publish.  (RCL, 48-55) If it decided not to publish, it was obligated to return Freund's manuscript to him, and he was permitted to keep his $2000 advance, which was a very large advance at the time, amounting to 1/4 of Freund's academic salary (RCL, 57).

Given the fact that the parties had bargained for an option, it is hard to see why the case was brought at all.  One relevant factor likely was the Press's demand that Freund sign a release in order to recover his manuscript.  The demand seems idiotic, as if the Press had forgotten that it had an option. Another factor was likely the appearance of a Louis Schaefer's definitive biography of O'Neill.  The first volume appeared in 1968 and would have destroyed the market for Freund's book.  The second volume (left), which was published in 1975 and won the Pulitzer Prize, rendered Freund's work unpublishable (RCL, 54, 58).  He may have had an argument that the Press's breach (or exercise of its option) hurt his chances at getting tenure, but he had gotten tenure by the time the Court of Appeals heard his case, so he had no basis for claiming damages on that account either.  Professor Goldberg's preference for allowing the parties to choose to put a price on the option to breach seems to have worked as designed in Freund.

Chodos v. West Publishing, discussed in RCL's sixth chapter, is another matter.  Despite the lack of tragedy in Freund, Chodos gives us farcical damages.  In 1995, Chodos pitched the idea of a book on fiduciary duties to Bancroft-Whitney, a division of Thomson Legal Publishing, which later merged with West.  Chodos was to be compensated with 15% of the gross revenues of the project.  Based on representations that he could expect revenues of about $1 million over a five-year period, he claimed to have invested 3600 hours in the project.  After the merger, West ran the numbers and determined it would lose $20,000 if it published the book.  It notified Chodos that it was passing (RCL, 59-60).  

Chodos alleged that the contract was illusory and sought to recover in quantum meruit for the thousands of hours of his valuable time ($400/hour) spent writing the book.  West countered that the duty of good faith and fair dealing prevented the contract from being illusory.  The District Court agreed with West and dismissed the case.  The Ninth Circuit, per Judge Reinhardt, agreed that the contract was not illusory but found that West had breached its duty of good faith and fair dealing because it was contractually obligated to publish the work if it was of good quality.  West had conceded that the work was of high quality, and so it could not refuse to publish for business reasons (RCL, 60-61).  So far, so good, but then the Ninth Circuit concluded that Chodos was entitled to recovery in quantum meruit, a remedy that was not justified given the breach of contract.  

The case was remanded to determine damages.  Chodos sought $1.44 million, the value of his time.  West argued for more like $70,000, what he likely would have made had the book been published.    Chodos maintained that his main source of income from the publication would have been the referrals and legal business he would have gotten from publication.  Chodos self-published the book, but the jury did not get to see evidence of its sales.  They were not impressive.  The jury returned a verdict of $300,000, which was upheld, without opinion, on appeal (RCL, 64-66). 

Professor Goldberg faults the courts for allowing the restitution claim to proceed.  The courts rejected contract damages as too speculative, but were they?  Wouldn't they have to be somewhere between $150,000 (15% of $1 million in expected revenue) and 15% of whatever much lower number for revenues prompted West not to publish?  Moreover, as the jury's split-the-baby approach indicates, restitution damages were no less speculative.  The parties did not make much effort to establish either West's non-existent unjust enrichment or the real value of Chodros's efforts.  If the main value he expected to get from the book was referrals, the court could have considered that he did in fact publish the book and thus should have been required to discount his recovery by the amount of benefit he received from such referrals (RCL, 67-68).  Professor Goldberg seems to think that, as the book was published in any case, the only loss Chodros suffered was delay in publication.  But there Professor Goldberg seems to be underestimating the difference in value between publishing with West and self-publishing.  If I were looking for an expert on the law of fiduciaries (and Judge Cardozo was not available), I would be far more inclined to hire someone who had published a major treatise with a leading legal publication house than  someone who self-published their work.  Moreover, without the assistance of West's marketing apparatus and distribution network, word of Chodros's work would be far less likely to reach potential clients.   

True to form, Professor Goldberg concludes by suggesting that the parties could have just negotiated for an option and avoided the headaches and the uncertain exposure to liability associated with protracted litigation.   Even though such cases rarely result in litigation, it would be a simple matter for the publisher to offer an advance in return for the right not to publish the book, notwithstanding its quality, should market conditions counsel against publication.  Absent such ideal contract design, Chodros may indeed have been entitled to damages for breach of the covenant of good faith and fair dealing.  However, the court's award of restitution damages made little sense in these circumstances (RCL, 69-70).

Tuesday Top Ten - Contracts & Commercial Law Downloads for February 1, 2022

Happy February to contract law devotees far and wide! You may think you seen this before since the Tuesday Top Ten keeps coming back, but rest assured that we provide nothing but the freshest in SSRN download rankings around here.

Top Downloads For:

Contracts & Commercial Law eJournal

Recent Top Papers (60 days)

As of: 03 Dec 2021 - 01 Feb 2022

Rank	Paper	Downloads
1.	Philosophy of Contract Law Daniel Markovits and Emad H. Atiq Yale Law School and Cornell University - Law School	244
2.	The Internal Point of View in Private Law Jeffrey A. Pojanowski and Paul B. Miller Notre Dame Law School and Notre Dame Law School	212
3.	The Mystery of the Missing Choice-of-Law Clause John F. Coyle University of North Carolina School of Law	186
4.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	173
5.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	171
6.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	136
7.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	136
8.	Unjust Enrichment: Principle or Cause of Action? Lionel Smith and Samuel Beswick McGill University, Faculty of Law, Paul-André Crépeau Centre for Private and Comparative Law and Peter A. Allard School of Law, University of British Columbia	114
9.	Strict Products Liability 2.0: The Triumph of Judicial Reasoning over Mainstream Tort Theory Mark Geistfeld New York University School of Law	108
10.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	99

 

Top Downloads For:

Law & Society: Private Law - Contracts eJournal

Recent Top Papers (60 days)

As of: 03 Dec 2021 - 01 Feb 2022

Rank	Paper	Downloads
1.	The Mystery of the Missing Choice-of-Law Clause John F. Coyle University of North Carolina School of Law	186
2.	Why Corporate Law Is Private Law Asaf Raz University of Pennsylvania Law School	173
3.	The Many Layers and Dimensions of Contract Design Marcelo Corrales Compagnucci, Helena Haapio and Mark Fenwick Centre for Advanced Studies in Biomedical Innovation Law (CeBIL), Faculty of Law, University of Copenhagen, University of Vaasa, School of Accounting and Finance, Business Law and Kyushu University - Graduate School of Law	171
4.	Credit Scoring Duality Pamela Foohey and Sara Sternberg Greene Yeshiva University - Benjamin N. Cardozo School of Law and Duke University School of Law	136
5.	Arbitration Effect Farshad Ghodoosi and Monica Sharif California State University, Northridge, Nazarian School of Business & Economics, and California State University, Los Angeles	136
6.	Unjust Enrichment: Principle or Cause of Action? Lionel Smith and Samuel Beswick McGill University, Faculty of Law, Paul-André Crépeau Centre for Private and Comparative Law and Peter A. Allard School of Law, University of British Columbia	114
7.	The Present and Near Future of Self-Driving Contracts Anthony J. Casey and Anthony Niblett University of Chicago Law School and University of Toronto - Faculty of Law	99
8.	Who Has the Power to Enforce Private Rights? Rebecca Stone University of California, Los Angeles (UCLA) - School of Law	97
9.	Private Law Rights as Democratic Participation: Kelsen on Private Law and (Economic) Democracy Helge Dedek McGill University - Faculty of Law	87
10.	Jubilee Under Textualism John P. Hunt University of California, Davis - School of Law	75

 

Guest post: Michael Simkovic & Meirav Furth Matzkin on Pigouvian Contracts

Pigouvian Contracts
Michael Simkovic & Meirav Furth Matzkin

Download it here.

Consumer attention is a scarce common resource. It is scarce because our cognitive ability to process information is limited. When we pay attention to one thing, we inevitably deflect attention from other things. Consumer attention is also a common resource because it benefits not only the particular consumer who pays attention, but also other consumers. For example, when a consumer pays attention to a company’s “terms and conditions,” that consumer can alert others about consumer-unfriendly terms through social media channels.

Firms generate negative externalities by over-exploiting consumers’ limited attention through long and complex standardized agreements, even for transactions that are trivial in value. The use of these overly complex contracts prevents most consumers from reading and understanding the terms of their agreements.

If more consumers could comprehend contractual terms, then more consumers could shop around for better terms, negotiate, or decline to transact with a seller who failed to offer sufficiently buyer-friendly terms.  In this hypothetical world of widespread comprehension, sellers would be encouraged to offer all consumers more buyer-friendly terms. This means that comprehending consumers could generate positive externalities, improving the terms for non-reading consumers.

This Article develops an illustrative model which shows that sellers may be incentivized to make it exceedingly difficult for even a small fraction of consumers to comprehend their contracts.  As has been previously observed, even small search costs can eliminate competition with respect to contract terms.  Furthermore, sellers have incentives to encourage consumers to harbor overly optimistic views about their contracts by selectively highlighting benefits and obscuring costs.

Indeed, empirical evidence shows that sellers increasingly make their contracts so long and complicated that most consumers do not read them, at least not until it is too late. In a world in which consumers cannot distinguish between sellers with varying contract quality, sellers have incentives to use ever more pro-seller terms because they can do so without penalty.  Indeed, we demonstrate that the extent to which sellers will offer inefficient contracts to all consumers is a function of the proportion of consumers who comprehend contracts.

If regulators had perfect information, they could simply ban inefficient contract terms that harm consumers more than they benefit sellers.  But regulators usually cannot readily observe either the benefits of a contract term to sellers or the costs to consumers.

The ideal way to determine whether a term is socially desirable is to make that term available in a market where consumers understand all contract terms.  In such a market, consumers would incorporate the implications of the contract terms into their purchasing decisions and only enter contracts that make them better off.  Informed consumer purchasing decisions would, in turn, provide feedback to sellers, who would be forced to improve their contracts to survive in a competitive market.

However, this ideal is costly because of the attention costs inherent in numerous individual consumers understanding contract terms and forming independent judgments about them. When such costs are not taken into account—as they are not under the current legal regime—sellers do not fully internalize either the costs to consumers of anti-consumer contracts or the costs to consumers of reading and understanding contracts.  This leads to an overproduction of lengthy and complicated contracts that are also typically pro-seller. 

Our Article proposes to solve this problem by changing both sellers’ incentives regarding contract drafting and consumers’ incentives regarding contract comprehension. We encourage policymakers to make sellers internalize contract comprehension costs through quasi-Pigouvian taxation of sellers’ contracts.  Because regulators typically cannot directly observe whether and to what extent a contract term is inefficient, we propose to tax sellers based on the more easily observable costs to consumers of comprehending sellers’ contracts.

We demonstrate that our proposed tax would fall more heavily on sellers using inefficient contracts than on those using efficient contracts, even though regulators may not know ex ante which contracts are efficient.  This is because the tax would be imposed upon the presentation of a contract, regardless of whether or not the consumer chooses to transact.  When sellers present an inefficient contract, consumers who comprehend the contract will be less likely to transact.  The tax would make it costly for sellers to attempt to drive down consumer comprehension levels by increasing comprehension costs.  Moreover, we propose to compensate consumer contract comprehension and information sharing efforts.